How Federal Spending Would Be Cut Under the Sequester

By

Damian Paletta

Updated Feb. 22, 2013 7:48 p.m. ET

On March 1, $85 billion in across-the-board federal spending cuts—known in Washington parlance as the sequester—are set to begin, prompted by a 2011 law designed to reduce the government's budget deficit. Here are answers to some commonly asked questions about how it would work, assuming it takes effect as scheduled.

Where did the sequester come from?

WSJ's Damian Paletta says the sequester cuts - including painful slashing of defense spending - now seem inevitable. The question now is how long they'll last. WSJ's David Wessel explains the hit to federal employees and when furloughs could kick in.

With Washington at loggerheads over spending and taxes, a round of harsh spending cuts - known as the 'sequester' - is imminent. WSJ's Economics Editor David Wessel explains how the sequester came to be and what happens if and when it arrives.

The sequester was one result of the deficit-reduction deal struck by the White House and Congress in the summer of 2011, which also raised the government's borrowing limit, and fits within Washington's broad yet stuttering efforts to bring the budget deficit down to levels most economists consider sustainable.

Republicans wanted significant spending cuts as a condition for voting to raise the debt ceiling. The parties agreed to raise the debt ceiling and implement new caps on spending for 10 years, which would save $917 billion. Both sides knew they would need more deficit reduction to win Republican support. So the White House proposed a process aimed at forcing lawmakers to craft a deal over the next 16 months.

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First, they would create a congressional "supercommittee" with members from both parties to hammer out a deal to reduce the deficit by another $1.2 trillion over roughly a decade. The White House proposed a trigger called the "sequester" that would kick in if the committee failed and no other comparable deficit-reduction plan was reached.

The idea was that the sequester would be so dreadful it would force the two parties to reach a deal. Democrats and Republicans agreed to essentially split the spending cuts between defense and non-defense programs over nine years, beginning in 2013, and members of both parties voted for the plan.

The supercommittee failed to reach a deal. Now, while members of both parties agree the sequester is a bad way to reduce spending, they still can't agree on a substitute.

What happens on March 1?

The impact likely wouldn't be felt immediately because the agencies would have to adjust their budgets. Many of the cuts wouldn't take place until weeks or months later.

Many federal agencies would begin informing roughly one million civilian employees that they could soon be forced to take unpaid leave, one day per week perhaps. These furloughs likely won't begin until around April.

Federal agencies affected also would send letters to contractors and state and local officials informing them of the cuts. They could detail the size and extent of the reductions over the remaining seven months of the federal fiscal year, which ends Sept. 30.

That could in turn force a state governor who receives federal aid or a contractor with government business to reevaluate their own budgets and inform employees or subcontractors of their own cuts. It could take a while for the ripple effect to spread.

Which agencies and programs are affected?

Most agencies would be affected, but a large number are exempt. Those affected by the cuts include the departments of energy, state, defense, labor, transportation, justice and the National Institutes of Health.

Among those exempted are the Federal Reserve and the U.S. Postal Service, which have revenue sources outside the federal budget; benefits paid by the Social Security, Medicare and Medicaid programs; and military pay for uniformed personnel.

How will spending be cut?

First, agencies would cut back on spending such as travel and filling vacant positions, seeking to minimize the impact.

Many agencies would further reduce labor costs through the furloughs. For example, the Federal Aviation Administration has said it could force all of its 47,000 employees, including air traffic controllers, to take unpaid leave for a certain period.

The Social Security Administration said the cuts could mean it takes longer for Americans to file retirement and disability claims, and the Internal Revenue Service has said they could complicate the April tax filing season.

The cuts will be split among around 1,200 different federal programs, and then extended to tens of thousands of subprograms and projects.

The reductions would be split into three broad categories.

1) Defense spending, which includes Pentagon and defense intelligence spending, accounts for half the sequester cuts. Many of these programs will be reduced by roughly 13% over seven months.

2) Non-defense spending. This would include housing, education, or transportation programs.

3) Medicare. There will be a 2% cut in the payments to Medicare providers, such as hospitals and doctors.

Do the cuts have to be spread evenly over the remaining seven months?

Not necessarily. Agencies will have the flexibility to apportion the cuts as they see fit over time. But they will likely try to spread them out as much as possible, believing that the impact will be less concentrated. Also, while the sequester cuts the agencies' "budget authority" by about $85 billion between March 1 and Sept. 30, actual outlays of government dollars would fall by about $44 billion during this period, with the rest of the decline occurring later, according to the Congressional Budget Office. This is because outlays often lag the budget by months or years.

How much flexibility will agencies have to shield some programs from cuts?

The White House and federal agencies say there won't be much flexibility, in part because each program and subprogram is subject to the same "across-the-board" reductions.

Sen.
James Inhofe
(R., Okla.) has proposed passing a law that would give agencies more flexibility in how they decide to apportion the cuts, but the White House has said that would be unworkable given the reductions that must be taken.

How are government contractors affected?

This is one of the biggest mysteries because it depends on how companies try to absorb the cuts or change their business models. Many defense contractors warn the cuts could hurt their businesses, but many are already seeing their business decline as the military winds down two wars and adjusts to other budget reductions.

A range of companies have raised alarms about the potential impact of the sequester, but most say they have no clear sense what the precise impact would be.

$85 billion? That sounds like a lot of money. How does this compare with the size of the government's budget ?

The government spent $3.538 trillion in the fiscal year that ended in September 2012. So $85 billion is 2.4% of the federal budget.

What's unusual about the sequester, though, is that some of the largest programs in the federal budget are exempt. That means the cuts are concentrated on a smaller pool of government programs. Depending on the agency, cuts are going to be in the ballpark of 5% and 13%, according to various estimates from government officials.

If the furloughs don't begin in force until around April, doesn't the government have time to sort things out?

Probably. White House officials stress that the impact will be felt in March as the cuts begin to take shape, but the actual impact is less clear.

Another looming deadline is March 27. That's when funding for a number of federal programs is projected to run out. If Congress doesn't reach a deal to fund the government by then, we would face a partial government shutdown. That would mean many federal workers would no longer face just a one-day-a-week furlough. Rather, they would be sent home indefinitely.

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